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Country Garden to delay key vote as China rolls out more support

Published 08/30/2023, 10:05 PM
Updated 09/01/2023, 02:01 AM
© Reuters. FILE PHOTO: A construction site of residential buildings by Chinese developer Country Garden is pictured in Tianjin, China August 18, 2023. REUTERS/Tingshu Wang/File Photo
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HONG KONG/SHANGHAI (Reuters) -Embattled Chinese developer Country Garden is delaying a deadline for creditors to vote on whether to postpone payments for an onshore private bond, according to a document seen by Reuters, while Beijing rolled out more support measures for the property sector.

The vote on the 3.9 billion yuan ($535 million) onshore private bond is a key hurdle Country Garden will have to overcome as it strives to avoid default amid a spiralling financing crisis and opposition from some creditors.

The voting was due to conclude by Thursday 10 p.m. Hong Kong time (1400 GMT). It was to be held via private meetings.

Country Garden on Thursday night pushed the deadline by one day to 10 p.m. Beijing time (1400 GMT) on Friday, to give bondholders "sufficient time" to prepare for the vote, according to a document seen by Reuters.

One source said the announcement of delay in vote was issued half an hour before voting was to conclude on Thursday night.

The company did not immediately respond to Reuters request for comment.

Country Garden is China's largest private developer. The company's mounting woes are the latest to hit the property sector and have sparked fears of financial system contagion at a time when the country is already struggling with a broader economic slowdown.

The property sector, which accounts for roughly a quarter of the economy and is now grappling with a debt crisis that has rattled global markets, has been on a downward spiral since 2021 after Beijing cracked down on debt accumulation by developers.

"A slowdown in China is mostly priced into global markets but a real recession of the world's second-largest economy is not ideal for anyone," said Matthew Pestronk, president and co-founder of Post Brothers, a Philadelphia-based real estate development firm.

As concerns mount about the crisis taking a growing toll on the country's economy, weighing on consumer confidence and scaring investors, the Chinese government has rolled out a string of support measures in the last few days.

In the latest move, the People's Bank of China, the country's central bank, on Thursday announced the lowering of existing mortgage interest rates for first-time homebuyers as well as the downpayment ratio in some cities.

While it did not specify the size of existing mortgage rate cuts, the central bank said the downpayment ratio for first-time home purchases should be no lower than 20%, and no lower than 30% for second-home purchases.

Currently, most major cities have about a 30% downpayment ratio for first homes, and 40% or more for second homes.

Separately, two more major cities said they would allow people to take preferential loans for first-home purchases regardless of credit records after two other top-tier cities, Guangzhou and Shenzhen, made similar moves on Wednesday.

Goldman Sachs said in a note it sees "a high possibility" that more big cities will follow suit in easing mortgages.

If the move was broadly implemented in large cities it "may provide a modest growth impulse to the property market," although the magnitude was likely to be measured, it said in the note.

"There's a lot happening on the policy front," said Phillip Wool, a co-portfolio manager of Rayliant Quantamental China Equity ETF. "It's easy to see why Country Garden imagines that if they can hold out a little longer, even though there's no doubt they're in a really bad situation, they might be able to turn the corner and avoid the worst outcome."

DEFAULT RISK

Adding to the property sector's woes, Moody's (NYSE:MCO) slashed the credit ratings of Country Garden by three notches to Ca from Caa1 on Thursday due to worries the firm could be on the brink of default.

"The rating downgrades with negative outlook reflect Country Garden's tight liquidity and heightened default risk, as well as the likely weak recovery prospects for the company's bondholders," said Moody's senior vice president Kaven Tsang.

Country Garden has been in talks with onshore creditors to extend payments on the private bond and has proposed to repay in instalments over three years instead of meeting its obligations by the deadline on Saturday.

"In the onshore market, debt extension is a common practice, and many developers have reached an agreement with investors," said Gary Ng, Asia Pacific senior economist at Natixis.

Ng said that an in-house analysis had revealed 0.4% of China's corporate bonds were extended on a trailing 12-month basis, keeping the actual default rate low at 0.08% by the end of June.

"Country Garden may be able to extend its debts, but it does not mean the company and property sector are out of the woods unless home sales rebound."

Some creditors said they told the company last week they would not support an extension.

Bondholders appeared set to vote on more than three proposals on Thursday.

The first is an extension that would allow the firm to repay the principal by 2026, and another added this week is a grace period of 40 days to make payment should the extension proposal be vetoed.

On Wednesday, creditors holding 10.5% of the outstanding principal, added a new proposal where they can vote to immediately call the company in default.

The company declined to comment ahead of the vote.

RISK TO BROADER ECONOMY

One bondholder of Country Garden, which on Wednesday posted a staggering $6.7 billion in first-half losses and warned of default risks, said he wanted the company to liquidate now so creditors can recover their assets earlier.

The bondholder declined to be named as he was not authorised to speak to the media.

Country Garden's total liabilities were about $194 billion by the end of June, unchanged from the end of 2022, based on its first-half financial results.

It faces 108.7 billion yuan ($14.91 billion) worth of debts due within 12 months, while its cash level falls short at around 101.1 billion yuan.

© Reuters. FILE PHOTO: A construction site of residential buildings by Chinese developer Country Garden is pictured in Tianjin, China August 18, 2023. REUTERS/Tingshu Wang/File Photo

A default by Country Garden would exacerbate the country's spiralling real estate crisis, put more strain on its struggling banks and could delay the prospect of a recovery of not only the property market, but the overall Chinese economy.

The company's extension plan for the onshore private bond calls for payments in seven instalments ending in September 2026. The coupon will be kept at the same rate at 5.65% and paid annually.

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